Having so many ideas for a topic, I really couldn't decide what to focus on. There are plenty of creative, unique villains in videogames, but I ultimately went with the one that's made me think of what really constitutes a villain.
Silent Hill 2 is, by many, considered a masterpiece of the psychological horror genre. Arguably the best Silent Hill in the franchise, SH2 offers solid storytelling and a great atmosphere that is only rarely seen in videogames today.
Silent Hill games almost always have a designated villain. Not as obvious as other games, but you can still pinpoint who is the bad guy that needs to be punished. In the first game, Dahlia Gillespie is the main 'antagonist', so to speak. Her crazy demon-worshipping habits result in a fire burning down her whole house, her daughter being used as an incubator for their cult's god, and ultimately leads to the town's spiritual power to become corrupted and center around their cult.
In Silent Hill 2, however, it's never obvious who the villain is, until later in the game. Needless to say, there will be spoilers from this point on, so if you haven't yet beaten the game, I advise you to stop reading.
At the beginning of the game, the protagonist, James Sunderland, receives a letter from his wife, Mary, telling him that she's waiting for him in Silent Hill, a place where they had vacationed years ago. The thing is, Mary died of an illness three years ago, according to James, so how could she have possibly written a letter to him, let alone state that she's waiting for him? Curiosity gets the best of James, as he drives all the way to Silent Hill to see what is really happening.
Upon arrival, it is clear to James that something has gone terribly wrong; there are monsters everywhere, the town is eerily quiet, and, worst of all, there is no sign of Mary. James (and the player) can only assume that this is the work of a higher power doing terrible, horrible things to the town.
Around this time, James meets a woman named Maria, who bears a striking resemblance to Mary. Maria offers to help James in his search for Mary, and James unsurely complies.
The player is later introduced to what seems to be the main antagonist of the game: Pyramid Head.
Pyramid Head first shows up in an apartment building, and, after a close encounter, continues to follow James around in his search for Mary.
Now, Pyramid Head is OBVIOUSLY the villain here, right? He's following James and Maria around! Worst of all, he kills Maria later in the game! It's only a matter of time before the game confirms it!
Actually, it's not that simple. As James explores an underground prison, he encounters Maria locked up in a jail cell, completely unscathed after Pyramid Head stabbed her entire body with a giant knife. Wondering what exactly happened when she "died", James sets out to free her, only to find her dead once more when he arrives at her cell. Who killed her again if Pyramid Head wasn't around? The plot thickens...
Later in the game, James arrives at the hotel he and Mary stayed in during their vacation. Looking through the hotel, he finds a videotape that was apparently left behind when he and Mary checked out and left the town. James plays the videotape, and finds out the truth of what happened to Mary.
Mary was indeed ill, but her condition was so grave that the hospital staff decided to let her go home to die in peace. James, unable to cope with his wife's suffering, suffocated her with a pillow to end her pain.
It is at this point in the game where everything starts to come together. On the way to the final part of the game, James comes across two Pyramid Heads who kill a healthy, live Maria right in front of him. James then realizes that the person who is causing these horrible things to happen and is responsible for the traumatic events that have accompanied him since his arrival in town is none other than himself.
James' guilt over Mary's death caused darkness to form in his heart, and eventually led to the town of Silent Hill calling him to face his inner demons. The letter he received from Mary wasn't even real; it disappears over the course of the game, becoming a blank piece of paper, then an empty envelope, and finally, vanishing completely from James' inventory.
Pyramid Head is an entity that the town brings to life from James' subconscious, as a way to punish him for what he did to Mary. He is also forced to watch Maria die repeatedly as part of the punishment. That's also why Maria is so similar to Mary.
I think there's something really interesting and disturbing when it comes to the idea of James being his own villain. It shows that, sometimes, the scariest thing may not be an unknown presence, but rather your own twisted thoughts and ideas turning against you, coming to life thanks to the dark, spiritual power of a small town.